Question

Marc, a single taxpayer, earns $156,500 in taxable income and $4,850 in interest from an investment in city of Birmingham Bonds. Using the U.S. tax rate schedule for year 2019, what is his effective tax rate?

Answer 1

Solution:

Effective Tax Rate = Tax Expense / Taxable Income = $ 31,734 / $ 156,500 = 20.27%

Working:

Marc Federal tax will be on $ 156,500 of taxable income for the year 2019

= $ 14,382 + 24% ( $156,600 - $ 84200 ) = $ 14,382 + $ 17,352 = $ 31,734.

Alternatively, Effective Tax Rate = Tax Expense / Total Income = $ 31,734 / ($ 156,500 + $ 4,850) = 19.66 %

Note:

1) We can calculate, Effective tax rate in two ways

a) By dividing tax expense with taxable income.( Most Preferred)

b) By dividing tax expense with total income.